The IRS recently revoked the 501(c)(4) status of an organization that identifies and trains potential candidates for one of the political parties. In doing so, the IRS borrowed a restriction from the law governing 501(c)(3)s, which requires such groups to serve a public rather than a private interest. There are reasons to doubt whether this is a doctrinally sound position. But the more important question is whether the ruling is a further sign that the IRS is stepping up scrutiny of 501(c)(4) political activity.
It certainly would seem so. The IRS announced in February that it intends to look more closely at Form 990’s (the annual informational returns) filed by tax-exempt organizations to determine whether groups have violated limits on political activity. The announcement was followed by a letter to the IRS from some U.S. Senators calling for investigations to crack down on perceived abuses by some 501(c)(4)s and a letter from other Senators questioning whether IRS scrutiny was being applied in a partisan way. The private benefit doctrine may be another weapon the IRS is adding to its arsenal in this area.
At the end of the day this ruling may be little more than low-hanging fruit for the IRS—the partisan political objectives of the candidate-training group were apparent in its bylaws and affiliation—and not a ruling likely to have far-reaching consequences for other organizations. This revocation does, however, present a good time to think about some of the important considerations in establishing and operating a politically-active (c)(4):
- The organization may engage in unlimited direct and grassroots lobbying (and need not track its lobbying like a 501(c)(3) or 501(c)(6)).
- Donors are not publicly disclosed.
- The group’s primary purpose cannot be campaign intervention—this is widely understood to be something less than 50% of the organization’s expenditures, but the IRS has offered little guidance on this point. Some good-government groups have petitioned the IRS to issue clearer rules that set the thresholds much lower.
- Subject to the limits discussed in number 3 above, 501(c)(4)s can either engage in express advocacy directly or by contributing to an independent expenditure committee (i.e., a super PAC).
- But if not formed and operated carefully, FEC and state rules can require a 501(c)(4) organization to register and disclose its donors as a “political committee,” even if the organization spends less than 50% of its total funds on election-related activity.
- Appeals for funds must be carefully worded so that contributions received by the 501(c)(4) are not treated as a conduit contribution to a super PAC or other registered political committee.
- The lines between education, lobbying, and campaign intervention are blurry—and lay in different places for tax purposes and campaign finance purposes.
- Organizations may have to pay a tax under Section 527 on their political activities, which is calculated on the lesser of the net investment income to the organization or its political expenditures.
- Given the private benefit concerns flagged by the IRS in its recent ruling, it is important to focus on issues and ideas when characterizing the purpose of the organization and conducting organizational activities.
All of this underscores how important it is for a group forming and operating a 501(c)(4) to consider the full range of tax and campaign finance laws, both federal and state, that apply to its activities. Your tax-exemption—and the confidentiality of your donors—depends on it. More information from the IRS can be found here.